Commission Implementing Regulation (EU) 2021/2287 of 17 December 2021 imposing definitive countervailing duties on imports of aluminium converter foil originating in the People’s Republic of China and amending Implementing Regulation (EU) 2021/2170 imposing definitive anti-dumping duties on imports of aluminium converter foil originating in the People’s Republic of China

• (143) As regards the requested information concerning purchases of imported and domestic machinery and the related VAT exemptions and import tariff rebates, the Commission disagreed with the comments made by Nanshan Group. First, although Nanshan Group provided a fixed assets register for some of the group companies, it failed to provide comprehensive data about the VAT exemptions and import tariff rebates that the Commission had requested. Second, the Commission identified exemptions of both VAT and import duty during the investigation period in the sampled companies. These included exemptions for equipment purchased in previous years, but for which the benefit was amortized over the lifespan of that equipment and was thus partially allocated to the investigation period. Thus, the Commission established that the sampled companies still availed itself of benefits under this programme.

• (144) Finally, the claim that other transactions by Nanshan Group Co., Ltd., or other companies of the Nanshan Group, could be used as a proxy for transactions concerning LURs or equipment where no sufficient data was provided was unsubstantiated, since none of the companies in the group provided the complete information requested.

3.3.   Subsidies and subsidy programmes within the scope of the current investigation

• (145) On the basis of the information contained in the complaint, the Notice of Initiation and the replies to the Commission’s questionnaires, the following subsidies by the GOC were investigated:

• (a) Provision of preferential financing, direct credits and funding through equity, quasi-equity and other capital instruments (e.g. policy loans, credit lines, bank acceptance drafts, export financing)

• (b) Preferential export credit insurance

• (c) Grant Programmes

• — Technology, innovation, research and development grants and funds;

• — Industrial transformation and upgrading funds;

• — Ad hoc subsidies provided by municipal/provincial authorities.

• (d) Revenue foregone through Tax Exemption and Reduction programmes

• — Enterprise Income Tax (‘EIT’) reduction for High and New Technology Enterprises;

• — Preferential pre-tax deduction of research and development expenses;

• — Accelerated depreciation of instruments and equipment used by High-Tech enterprises for High-Tech development and production;

• — Dividend exemption between qualified resident enterprises;

• — Exemption or waiving of real estate and land use taxes

• — VAT exemptions and import tariff rebates for the use of imported equipment and technology

• — VAT Rebates on Domestically-Produced Equipment.

• (e) Government provision of goods and services for less than adequate remuneration (‘LTAR’)

• — Government provision of land use rights for less than adequate remuneration;

• — Provision of power for less than adequate remuneration;

• — Government provision of input materials (aluminium and steam coal) for less than adequate remuneration.

3.4.   Preferential financing

3.4.1.   Financial institutions providing preferential financing

• (146) According to the information provided by the three sampled groups of exporting producers, 48 financial institutions located within the PRC had provided financing to them. Of these 48 financial institutions, 47 were State-owned. The remaining financial institutions were either privately owned or the Commission was not able to determine whether they were State-owned or privately owned. However, only one State-owned bank filled in the specific questionnaire, despite a request to the GOC that covered all financial institutions which had provided loans to the sampled companies.

3.4.1.1.   State-owned financial institutions acting as public bodies

• (147) The Commission ascertained whether the State-owned banks were acting as public bodies within the meaning of Articles 3 and 2(b) of the basic Regulation. In this respect, the applicable test to establish that a State-owned undertaking is a public body is as follows [^ntr31-L_2021458EN.01034401-E0031]: “What matters is whether an entity is vested with authority to exercise governmental functions, rather than how that is achieved. There are many different ways in which government in the narrow sense could provide entities with authority. Accordingly, different types of evidence may be relevant to showing that such authority has been bestowed on a particular entity. Evidence that an entity is, in fact, exercising governmental functions may serve as evidence that it possesses or has been vested with governmental authority, particularly where such evidence points to a sustained and systematic practice. It follows, in our view, that evidence that a government exercises meaningful control over an entity and its conduct may serve, in certain circumstances, as evidence that the relevant entity possesses governmental authority and exercises such authority in the performance of governmental functions. We stress, however, that, apart from an express delegation of authority in a legal instrument, the existence of mere formal links between an entity and government in the narrow sense is unlikely to suffice to establish the necessary possession of governmental authority. Thus, for example, the mere fact that a government is the majority shareholder of an entity does not demonstrate that the government exercises meaningful control over the conduct of that entity, much less that the government has bestowed it with governmental authority. In some instances, however, where the evidence shows that the formal indicia of government control are manifold, and there is also evidence that such control has been exercised in a meaningful way, then such evidence may permit an inference that the entity concerned is exercising governmental authority.”

• (148) The Commission sought information about State ownership as well as formal indicia of government control in the State-owned banks. It also analysed whether control had been exercised in a meaningful way. For this purpose, the Commission had to partially rely on facts available due to the refusal of the GOC and the State-owned banks to provide evidence on the decision making process that had led to the preferential lending.

• (149) In order to carry out this analysis, the Commission first examined information from the State-owned bank that had filled in the specific questionnaire.

3.4.1.2.   Cooperating State-owned financial institutions

• (150) Only one State-owned bank, namely EXIM bank, provided a questionnaire reply.

3.4.1.3.   Ownership, formal indicia and exercise of control by the GOC

• (151) Based on the information received in the questionnaire reply, the Commission established that the GOC held, either directly or indirectly, more than 50 % of the shares in this financial institution.

• (152) Concerning the formal indicia of government control of the cooperating State-owned bank, the Commission qualified it as a ‘key State-owned financial institution’. In particular, the notice ‘Interim Regulations on the Board of Supervisors in Key State-owned Financial Institutions’ ³² states that: “The key State-owned financial institutions mentioned in these Regulations refer to State-owned policy banks, commercial banks, financial assets management companies, securities companies, insurance companies, etc. (hereinafter referred to as State-owned financial institutions), to which the State Council dispatches boards of supervisors”.

• (153) The Board of Supervisors of the key State-owned financial institutions is appointed according to the ‘Interim Regulations of Board of Supervisors of Key State-owned Financial Institutions’. Based on Articles 3 and 5 of these Interim Regulations, the Commission established that Members of the Board of Supervisors are dispatched by and accountable to the State Council, thus illustrating the institutional control of the State on the cooperating State-owned bank’s business activities.

• (154) In addition to these generally applicable indicia, the Commission found the following with respect to EXIM bank. EXIM bank was formed and operates in accordance with ‘The Notice of Establishing Export-Import Bank of China’ issued by the State Council, as well as the Articles of Association of EXIM bank. According to its Articles of Association, the State directly nominates the management of EXIM bank. The Board of Supervisors is appointed by the State Council in accordance with the ‘Interim Regulations on the Boards of Supervisors in Key State-owned Financial Institutions’ and other laws and regulations, and it is responsible to the State Council.

• (155) The Articles of Association also mention that the Party Committee of EXIM bank plays a leading and political core role to ensure that policies and major deployment of the Party and the State are implemented by EXIM bank. The Party’s leadership is integrated into all aspects of corporate governance.

• (156) The Articles of Association also state that EXIM bank is dedicated to supporting the development of foreign trade and economic cooperation, cross-border investment, the One Belt One Road Initiative, cooperation in international capacity and equipment manufacturing. Its scope of business includes short-term, medium-term and long-term loans as approved and in line with the State’s foreign trade and “going out” policies, such as export credit, import credit, foreign contracted engineering loans, overseas investment loans, Chinese government foreign aid loans and export buyer loans.

• (157) Furthermore, in its annual report of 2019, EXIM bank stated that it fully implemented all major policies and decisions made by the CPC Central Committee and the State Council.

• (158) The Commission also found that State-owned financial institutions, including EXIM bank, have changed their Articles of Associations in 2017 to increase the role of the China Communist Party (‘CCP’) at the highest decision-making level of the banks ³³.

• (159) These new Articles of Association stipulate that:

• — the Chairman of the Board of Directors shall be the same person as the Secretary of the Party Committee;

• — the CCP’s role is to ensure and supervise the Bank’s implementation of policies and guidelines of the CCP and the State; as well as to play a leadership and gate keeping role in the appointment of personnel (including senior management); and

• — the opinions of the Party Committee shall be heard by the Board of Directors for any major decisions to be taken.

• (160) This evidence shows that the GOC exercised meaningful control over the conduct of these institutions.

• (161) The Commission further sought information about whether the GOC exercised meaningful control over the conduct of EXIM bank with respect to its lending policies and assessment of risk, where they provided loans to the ACF industry. The following regulatory documents have been taken into account in this respect:

• — Article 34 of the Law of the PRC on Commercial Banks (‘Bank law’);

• — Article 15 of the General Rules on Loans (implemented by the People’s Bank of China);

• — Decision No 40;

• — Implementing Measures of the China Banking and Insurance Regulatory Commission (‘CBIRC’) for Administrative Licensing Matters for Chinese-funded Commercial Banks (Order of the CBIRC [2017] No 1);

• — Implementing Measures of the CBIRC for Administrative Licensing Matters relating to Foreign-funded Banks (Order of the CBIRC [2015] No 4); and

• — Administrative Measures for the Qualifications of Directors and Senior Officers of Financial Institutions in the Banking Sector (CBIRC [2013] No 3)

• — Three-year action plan for improving corporate governance of the banking and insurance sectors (2020-2022) (CBIRC, 28 August 2020) ³⁴

• — Notice on the Commercial banks performance evaluation method, (CBIRC, 15 December 2020)

• — Notice on the Supervision regulations concerning the behaviour of large shareholders of bank and insurance institutions (CBIRC, [2021] No 43) ³⁵.

• (162) Reviewing these regulatory documents, the Commission found that financial institutions in the PRC are operating in a general legal environment that directs them to align themselves with the GOC’s industrial policy objectives when taking financial decisions, for the following reasons.

• (163) With respect to EXIM bank, its public policy mandate is established in the notice of establishing EXIM bank as well as in its Articles of Association.

• (164) At the general level, Article 34 of the Bank law, which applies to all financial institutions operating in China, provides that “commercial banks shall conduct their business of lending in accordance with the needs of the national economic and social development and under the guidance of the industrial policies of the State”. Although Article 4 of the Bank Law states that, “commercial banks shall, pursuant to law, conduct business operations without interference from any unit or individual. Commercial banks shall independently assume civil liability with their entire legal person property”, the investigation showed that Article 4 of the Bank law is applied subject to Article 34 of the Bank law, i.e. where the State establishes a public policy the banks implement it and follow State instructions.

• (165) In addition, Article 15 of the General Rules on Loans provides that “In accordance with the State’s policy, relevant departments may subsidize interests on loans, with a view to promoting the growth of certain industries and economic development in some areas”.

• (166) Similarly, Decision No 40 instructs all financial institutions to provide credit support specifically to ‘encouraged’ projects. As already explained in Section 3.1 and more specifically in recital (94), projects of the ACF industry belong to the ‘encouraged’ category. Decision No 40 hence confirms the previous finding with respect to the Bank law that banks exercise governmental authority in the form of preferential credit operations.

• (167) The Commission also found that the CBIRC has far-reaching approval authority over all aspects of the management of all financial institutions established in the PRC (including privately owned and foreign owned financial institutions), such as [^ntr36-L_2021458EN.01034401-E0036]:

• — approval of the appointment of all managers of the financial institutions, both at the level of headquarters and at the level of local branches. Approval of the CBIRC is required for the recruitment of all levels of management, from the most senior positions down to branch managers, and even includes managers appointed in overseas branches as well as managers responsible for support functions (e.g. the IT managers); and

• — a very long list of administrative approvals, including approvals for setting up branches, for starting new business lines or selling new products, for changing the Articles of Association of the bank, for selling more than 5 % of their shares, for capital increases, for changes of domicile, for changes of organizational form, etc.

• (168) The Bank law is legally binding. The mandatory nature of the Five Year Plans and of Decision No 40 has been established above in Section 3.1. The mandatory nature of the CBIRC regulatory documents derives from its powers as the banking regulatory authority. The mandatory nature of other documents is demonstrated by the supervision and evaluation clauses which they contain.

• (169) Decision No 40 of the State Council instructs all financial institutions to provide credit support only to encouraged projects and promises the implementation of ‘other preferential policies on the encouraged projects’. On this basis, banks are required to provide credit support to the ACF industry.

• (170) Furthermore, even private commercial banking decisions must be overseen by the CCP and remain in line with national policies. In fact, one of the State’s three overarching goals in relation to banking governance is now to strengthen the Party’s leadership in the banking and insurance sector, including in relation to operational and management issues in companies. In this respect, the Three Year Action Plan of the CBIRC for the years 2020 to 2022 instructs to ‘further implement the spirit embodied in General Secretary Xi Jinping’s keynote speech on advancing the reform of corporate governance of the financial sector’. Moreover, the Plan’s section II aims at promoting the organic integration of the Party’s leadership into corporate governance: ‘we shall make the integration of the Party’s leadership into corporate governance more systematic, standardised and procedure-based […] Major operational and management issues must have been discussed by the Party Committee before being decided upon by the Board of Directors or the senior management.’

• (171) Also, the GOC has recently stipulated that even shareholders of financial institutions need to facilitate the exercise of the GOCs control via the institution’s corporate governance framework, as follows: ‘Large shareholders of bank and insurance institutions shall support bank and insurance institutions in establishing an independent and sound corporate governance structure with effective checks and balances, and encourage and support banks and insurance institutions to ensure the organic integration of Party leadership with corporate governance’ ³⁷.

• (172) Finally, the performance evaluation criteria of the CBIRC for commercial banks now, notably, take into account how financial institutions ‘serve the national development objectives and the real economy’, and in particular how they ‘serve strategic and emerging industries’ ³⁸.

• (173) Therefore, the Commission concluded that the GOC has created a normative framework that had to be adhered to by the managers and supervisors of the cooperating State-owned bank, who are appointed by the GOC and accountable to the GOC. Therefore, the GOC relied on this normative framework in order to exercise control in a meaningful way over the conduct of the cooperating State-owned bank whenever it was providing loans to the ACF industry.

• (174) The Commission also sought concrete proof of the exercise of control in a meaningful way based on concrete loans provided to the sampled exporting producers. In its questionnaire reply, the cooperating State-owned bank explained that it uses sophisticated credit risk assessment policies and models (rating system) when granting the loans at issue. EXIM bank further explained that there is no policy difference regarding the industry in which the borrower operates, the credit situation and capital status, etc.; nevertheless, such factors impact the credit rating assessment and the cost of the risk of the borrower. It may refer to relevant plans and policies in providing loans; however, in determining individual loan projects it applies a market-based assessment.

• (175) However, the cooperating State-owned bank refused to provide concrete examples of its credit risk assessment relating to the sampled companies on the ground that the information requested is of internal nature and contains business confidential information that is not permitted to be disclosed even though the Commission had a written consent from the sampled companies waiving their confidentiality rights.

• (176) In the absence of concrete evidence of creditworthiness assessments, the Commission therefore examined the overall legal environment as set out above in recitals (161) to (169), in combination with the behaviour of the cooperating State-owned bank regarding loans provided to the sampled companies. The investigation revealed that this behaviour contrasted with the bank’s official stance, as in practice the bank was not acting based on thorough market-based risk assessments.

• (177) In the course of the investigation, the Commission found that loans were provided to the three sampled groups of exporting producers at interest rates below or close to the People’s Bank of China (‘PBOC’) Loan Benchmark Rate and below or close to the Loan Prime Rate as announced by the National Interbank Funding Center (‘NIFC) that was introduced on 20 August 2019 ³⁹, regardless of the companies’ financial and credit risk situation. Hence, the loans were provided below market rates when compared to the rate corresponding to the risk profile of the sampled exporting producers.

• (178) The Commission therefore concluded that the GOC exercised meaningful control over the conduct of the cooperating State-owned bank with respect to its lending policies and assessment of risk concerning the ACF industry.

• (179) Following final disclosure, the GOC claimed that the Commission did not demonstrate that the cooperating State-owned bank, namely EXIM bank, is a public body and that the GOC exercised meaningful control over EXIM bank. The GOC claimed that the formal links are not sufficient to demonstrate meaningful control by the government and the existence of a public body. Also, the GOC claimed that the Commission did not demonstrate the lack of independence of the management of EXIM bank by arguing that the GOC exercises control over EXIM bank only in supervising the appointment of the management of the bank and its board. Further GOC claimed that the Commission relied excessively on Article 34 of the Chinese Banking law, which it considers to be only a guiding document without specificity to deduct that EXIM or other financial institutions would be vested with public authority.

• (180) The GOC further claimed it has not exercised meaningful control over EXIM bank or has been provided with governmental authority. GOC claimed that although Article 34 of the Chinese Bank Law requires that commercial banks act “under the guidance of the industrial policies” of the GOC, this provision should be considered a guiding principle for Chinese banks. Furthermore, the GOC claimed that also Article 15 of the General Rules on loans as well as Decision No 40 are not mandatory but only of a guidance nature. Finally, the GOC disagreed with the assertion that EXIM bank “provided loans at below or close to relevant benchmark rates” and claimed that the Commission has not provided the data to support this statement.

• (181) The Commission disagreed with the allegations of the GOC. The Commission did not rely only on “formal links” in order to qualify the cooperating State-owned EXIM bank as a public body but also demonstrated that the GOC exercised meaningful control over the bank for the following reasons.

• (182) As explained in recital (168) above, the Commission considered that the Chinese Bank law and Decision No 40 are of a mandatory nature. Furthermore, the findings of this investigation as well as the Commission’s findings in previous investigations concerning the same subsidy programme did not support the claim that banks do not take government policy and plans into account when making lending decisions. For example, the Commission found that the exporting producers benefited from preferential lending at below-market interest rates.

• (183) The investigation showed that Article 15 of the General Rules on Loans was actually applied in practice, and that Articles 4, 5 and 41 of the Bank law were applicable subject to Article 34 of the Bank Law, i.e. where the State establishes a public policy the banks implement it and follow State instructions. In fact, while Articles 4 and 5 of the Bank Law are part of Chapter I, which sets the general provisions, Article 34 is part of Chapter IV, which establishes the basic rules governing loans. The wording of Article 34: “commercial banks carry out their loan business upon the needs of national economy and the social development and under the guidance of the State industrial policies”, demonstrates that this provision is not of a guiding nature but has rather a mandatory character and provides a clear instruction to banks to take into account the State industrial policies when carrying out their loan business. The Commission also noted that the Decision No 40 of the State Council instructs all financial institutions to provide credit support only to encouraged projects and promises the implementation of “other preferential policies on the encouraged projects”. While Article 17 of the same Decision requires banks to respect credit principles, the Commission could not establish during the investigation that this was done in practice. To the contrary, loans were provided to the exporting producers irrespective of their financial situation and creditworthiness.

• (184) Moreover, as concerns specifically EXIM Bank, it is undisputable that this is a policy bank directly pursuing government policies by its own admission. As explained on its website ⁴⁰, EXIM is a State-funded and State-owned policy bank directly under the leadership of the State Council and dedicated to supporting, inter alia, China’s foreign trade and implementing the ‘going global’ strategy. The Board of Directors ⁴¹, the Board of Supervisors ⁴², and top executives ⁴³ of EXIM Bank contain members with high ranking in the CCP and/or representing a Ministry.

• (185) On that basis, the Commission maintains its position that the GOC relied on the normative framework in order to exercise control in a meaningful way over the conduct of the cooperating State-owned bank whenever it was providing loans to the ACF industry as described in the recital (173) above. This is exemplified in recital (170) above, which clearly indicates that the GOC intervenes in all major decisions taken by the bank’s management. This shows that the normative framework did not leave any margin of manoeuvre to the managers and supervisors of the bank as to whether to follow this framework or not with respect to the sampled exporting producers, thus putting the management of that bank in a position of dependence.

• (186) Finally, as mentioned in recital (177), in the course of the investigation, the Commission found that loans were provided to the three sampled groups of exporting producers at interest rates below or close to the People’s Bank of China (‘PBOC’) Loan Benchmark Rate and below or close to the Loan Prime Rate, regardless of the companies’ financial and credit risk situation. Therefore, considering the risk profile of the sampled exporting producers described in Section 3.4.2.3 below and that, according to the risk analysis performed by the Commission, the exporting producers should have received a lower credit rating and should thus have paid interest rates significantly above the risk-free rate, the Commission concluded that the loans at issue were provided below market rates Due to the sensitive nature of the data the detailed information of these loans can be disclosed to only the respective exporting producers.

• (187) The Commission therefore concluded that the GOC has exercised meaningful control over the conduct of the cooperating State-owned bank with respect to its lending policies and assessment of risk concerning the ACF industry.

3.4.1.4.   Conclusion on cooperating State-owned financial institutions

• (188) The Commission established that the cooperating State-owned bank implemented the legal framework set out above in the exercise of governmental functions with respect to the ACF sector. Therefore, it was acting as public body in the sense of Article 2(b) of the basic Regulation read in conjunction with Article 3(1)(a)(i) of the basic Regulation and in accordance with the relevant WTO case-law.

3.4.1.5.   Non-cooperating State-owned financial institutions

• (189) As set out in recital (146) above, none of the other State-owned financial institutions, which provided loans to the sampled companies, replied to the specific questionnaire. The GOC provided some information on the ownership of a number of banks, but not on their governance structure, risk assessment or examples relating to specific loans to the ACF industry.

• (190) Therefore, in line with the conclusions reached in Section 3.2.1, the Commission decided to use facts available to determine whether those State-owned financial institutions qualify as public bodies.

• (191) In previous investigations ⁴⁴, the Commission established that the following banks, which had provided loans to the sampled groups of exporting producers in the investigation at hand, were partially or fully owned by the State itself or by State-held legal persons: Agricultural Bank of China, Bank of Beijing, Bank of China, Bank of Communications, Bank of Jiangsu, Bank of Kunlun, Bank of Nanjing, Bank of Ningbo, Bank of Qingdao, Bank of Shanghai, Bank of Tianjin, Bank of Yantai, CCB, China Bohai Bank, China CITIC Bank, China Construction Bank, China Development Bank, China Everbright Bank, China Guangfa Bank, China Industrial Bank, China Industrial International Trust Limited, China Merchants Bank, China Merchants Bank Financial Leasing Co., Ltd., China Minsheng Bank, Chongqing Rural Commercial Bank, Daye Trust Co., Ltd., Dongying Bank, EverGrowing Bank, Fudian Bank, Guangdong Development Bank, Guosen Securities Co., Hang Fung Bank, Ltd., Hangzhou Bank, Hankou Bank, Hengfeng Bank Co., Ltd., Huaxia Bank, Hubei Bank, Industrial and Commercial Bank of China (ICBC), Minsheng Securities Co.,Ltd., Postal Savings Bank, Qilu Bank, Shanghai Pudong Development Bank, Shanghai Rural Commercial Bank, Shenyang Rural Commercial Bank, Sinotruk Finance Co. Ltd. and Zheshang Bank. Since no information has been provided indicating otherwise, the Commission maintained the same conclusion in the present investigation.

• (192) Using publicly available information, such as their websites, annual reports, information available in bank directories or on the internet, the Commission found that the following financial institutions that had provided loans to the three sampled groups of exporting producers were partially or fully owned by the State itself or by State-held legal persons:

Bank of Yantai	6,4 % of the bank’s shares are state owned.
Huishang Bank	32,45 % are state-owned (Anhui province energy group, Anhui province Guoyuan Financial Group etc.).
Nanyang Commercial Bank	On 30 May 2016, the bank became a wholly-owned subsidiary of China Cinda Group, which is fully owned by the GOC.

• (193) The Commission further established, in the absence of specific information from the financial institutions at issue indicating otherwise, the GOC’s ownership and control based on formal indicia for the same reasons as set out above in section 3.4.1.3. In particular, based on facts available, managers and supervisors in the non-cooperating State-owned financial institutions would appear to be appointed by the GOC and be accountable to the GOC in the same manner as in the cooperating State-owned bank.

• (194) With regard to the exercise of control in a meaningful manner, the Commission considered that the findings concerning the cooperating State-owned financial institution can be considered representative also for the non-cooperating State-owned financial institutions. The normative framework analysed in section 3.4.1.3 above applies to them in an identical manner. Absent any indication to the contrary, based on facts available, the lack of concrete evidence of creditworthiness assessments is valid for them in the same manner as for the cooperating State-owned bank.

• (195) Following final disclosure the GOC claimed the insufficiency of the Commission’s arguments concluding that all State-owned financial institutions also constituted public bodies. The GOC argued that the Commission relied on previous anti-subsidy cases and its own conclusions with respect to the State-owned financial institutions and lacked to perform a case-by-case analysis giving particular relevance to the specific circumstances of each case and with respect to each of the financial institutions. The GOC further argued that the Commission did not provide sufficient proof to determine the existence of meaningful control over the State-owned financial institutions, and relied merely on formal links constituting of ownership and control.

• (196) In this respect, the Commission recalled that in the absence of cooperation from the other State-owned banks than EXIM, the Commission had to rely on facts available. As already mentioned in its questionnaires, and in the absence of any new information provided by the GOC, the Commission concluded that the information from previous investigations, combined with formal indicia of control and additional findings of the investigation itself regarding EXIM bank and regarding the actual conduct of the banks towards the exporting producers constituted the best facts available in this case. In any event, the normative framework analysed in section 3.4.1.3 above applies to all banks in an identical manner. Furthermore, the GOC failed to put forward any evidence or argument to rebut the Commission’s findings concerning the fact that the other State-owned banks which provided loans to the sampled companies are public bodies within the meaning of Article 2(b) read in conjunction with Article 3(1)(a)(i) of the basic Regulation. The Commission thus maintained its position.

3.4.1.6.   Conclusion on all State-owned financial institutions

• (197) In light of the above considerations, the Commission established that all State-owned Chinese financial institutions that provided financing to the three sampled groups of cooperating exporting producers are public bodies within the meaning of Article 2(b) read in conjunction with Article 3(1)(a)(i) of the basic Regulation.

• (198) In addition, even if the State-owned financial institutions were not to be considered as public bodies, the Commission established that they would be considered entrusted or directed by the GOC to carry out functions normally vested in the government within the meaning of Article 3(1)(a)(iv) of the basic Regulation for the same reasons, as set out in Section 3.5.1.2 below. Thus, their conduct would be attributed to the GOC in any event.

3.4.1.7.   Private financial institutions entrusted or directed by the State

• (199) Overseas-Chinese Banking Corporation, Limited was considered to be privately owned, based on the findings established in previous anti-subsidy investigations ⁴⁵ and complemented by publicly available information. The Commission analysed whether this financial institution had been entrusted or directed by the GOC to grant subsidies to the ACF sector within the meaning of Article 3(1)(a)(iv) of the basic Regulation.

• (200) According to the WTO Appellate Body, ‘entrustment’ occurs where a government gives responsibility to a private body and ‘direction’ refers to situations where the government exercises its authority over a private body ⁴⁶. In both cases, the government uses a private body as a proxy to make the financial contribution, and “in most cases, one would expect entrustment or direction of a private body to involve some form of threat or inducement” ⁴⁷. At the same time, Article 3(1)(a)(iv) does not allow Members to impose countervailing measures to products “whenever the government is merely exercising its general regulatory powers” ⁴⁸ or where government intervention “may or may not have a particular result simply based on the given factual circumstances and the exercise of free choice by the actors in that market” ⁴⁹. Rather, entrustment or direction implies “a more active role of the government than mere acts of encouragement” ⁵⁰.

• (201) The Commission noted that the normative framework concerning the industry mentioned above in recitals (161) to (168) applies to all financial institutions in the PRC, including privately owned financial institutions. To illustrate this, the Bank Law and the various orders of the CBIRC cover all Chinese-funded and foreign-invested banks under the management of the CBIRC.

• (202) Furthermore, the majority of loan contracts with private financial institutions had similar conditions as the contracts with State-owned banks, and the lending rates provided by the private financial institutions were similar to the rates provided by the State-owned financial institutions.

• (203) In the absence of any divergent information received from the private financial institutions, the Commission concluded that, in so far as the ACF industry is concerned, all financial institutions (including private financial institutions) operating in China under the supervision of the CBIRC have been entrusted or directed by the State in the sense of Article 3(1)(a)(iv), first indent of the basic Regulation to pursue governmental policies and provide loans at preferential rates to the ACF industry.

• (204) Following final disclosure, the GOC claimed that the Commission failed to demonstrate entrustment or direction by the GOC, in particular a link between the government and the specific conduct of all financial institutions. The GOC argues that exercising its general regulatory powers by giving a mere guidance or encouragement are not sufficient to show entrustment and direction. In addition, the GOC claimed that the Commission failed to its duty to conduct such an analysis for each entity.

• (205) The Commission disagreed with this view. Since the normative framework explained in recitals (161) to (173), which applies to all banks in China i.e. whether publicly-owned or private, is legally binding as further confirmed in recitals (182) and (183), it does not amount to a mere encouragement or guidance by the government. The Commission already established in recital (169) above that Decision No 40 instructs all financial institutions to provide credit support only to encouraged projects even though Article 17 of the same Decision also asks the bank to respect credit principles. Furthermore, the Commission established in recital (185) that the GOC relied on this normative framework in order to exercise control in a meaningful way over the financial institutions not leaving them any margin of manoeuvre as to whether to implement it or not. Therefore, there is a clear link between the GOC and the specific conduct of the private banks, which demonstrates entrustment and direction by the GOC.

• (206) In addition, the Commission recalled that in the absence of cooperation from the private banks, it had to rely on facts available. Since there was partial cooperation from only one State-owned bank, the Commission used the information available for this bank, which was proven to be a public body, and compared it with the lending conditions offered by the non-cooperating private banks. Moreover, the RCCs with the sampled companies did not reveal any significant differences between loan conditions or rates provided by the private financial institutions and those provided by State-owned financial institutions. The fact that there was an overlap in rates shows that the private banks also provided loans below market terms in compliance with the normative framework referred to above. Therefore, the GOC’s claim that the Commission failed to its duty to conduct such an analysis for each entity is unfounded.

• (207) After final disclosure, the Nanshan Group also argued that since financial institutions varied their rates, conditions and types of products depending on the company to which they extended financing, this indicated that they are not being entrusted and directed by the State to offer specific or preferential lending conditions, but rather provide financing following market terms and the financial position of their customer.

• (208) The fact that the sampled companies benefitted from different types of loans during the investigation period with variances in respect of rates and other conditions, does not necessarily mean that these loans were received at market conditions. Indeed, as mentioned already in recital (177) above, the Commission found that loans were provided to the three sampled groups of exporting producers at interest rates below or close to the People’s Bank of China (‘PBOC’) Loan Benchmark Rate and below or close to the Loan Prime Rate as announced by the National Interbank Funding Center (‘NIFC) that was introduced on 20 August 2019 ⁵¹, regardless of the companies’ financial and credit risk situation. Hence, the loans were provided below market rates, and the claim is dismissed.

• (209) Consequently, the Commission confirmed its conclusion that, in so far as the ACF industry is concerned, all financial institutions, including private financial institutions, operating in China have been entrusted or directed by the State in the sense of Article 3(1)(a)(iv), first indent of the basic Regulation to pursue governmental policies and provide loans at preferential rates to the ACF industry.

3.4.1.8.   Credit ratings

• (210) In previous anti-subsidy investigations, the Commission already determined that domestic credit ratings awarded to Chinese companies were not reliable, based on a study published by the International Monetary Fund ⁵², showing a discrepancy between international and Chinese credit ratings, combined with the findings of the investigation concerning the sampled companies. Indeed, according to the IMF, over 90 % of Chinese bonds are rated from AA to AAA by local rating agencies. This is not comparable to other markets, such as the Union or the USA. For example, less than 2 % of firms enjoy such top-notch ratings in the US market. Chinese credit rating agencies are thus heavily skewed towards the high end of the rating scale. They have very broad rating scales and tend to pool bonds with significantly different default risks into one broad rating category ⁵³. According to the China bond market insight 2021 by Bloomberg ⁵⁴, five Chinese local rating agencies dominate the bond market: China Chengxin, Dagong, Lianhe, Shanghai Brilliance, and Golden credit rating, and around 90 % of the bonds are rated AAA by local rating agencies. However, many of the issuers have received a lower ‘S&P’ (Standard and Poor) global issuer rating of A and BBB ⁵⁵.

• (211) In addition, foreign rating agencies, such as Standard and Poor’s and Moody’s, typically apply an uplift over the issuer’s baseline credit rating based on an estimate of the firm’s strategic importance to the Chinese Government and the strength of any implicit guarantee when they rate Chinese bonds issued overseas ⁵⁶.

• (212) The Commission also found further information to complement this analysis. First, the Commission determined that the State can exercise a certain influence over the credit rating market. According to the information provided by the GOC, during the investigation period, there were 12 domestic credit rating agencies active on China’s bond market a majority of which are State-owned. In total, 60 % of all rated bonds in China had been rated by a State-owned ratings agency ⁵⁷.

• (213) Second, there is no free entrance on the Chinese credit rating market. It is essentially a closed market, since rating agencies need to be approved by the China Securities Regulatory Commission (‘CSRC’) or the PBOC before they can start operations ⁵⁸. The PBOC announced mid-2017 that overseas credit rating agencies would be allowed to carry out credit ratings on part of the domestic bond market, under certain conditions. The Commission also found that during the investigation period, there were two foreign-owned and two Sino-foreign joint venture credit rating agencies operating on the Chinese market. However, these credit rating agencies follow Chinese rating scales and are thus not exactly comparable with international ratings, as explained above.

• (214) Finally, a 2017 study performed by the PBOC itself confirms the Commission’s findings, stating in its conclusions that “if the investment level of foreign bonds is set to international rating BBB-and above, then the domestic bond investment grade may be rated at AA-level and above, taking into account the difference between the average domestic rating and the international rating of 6 or more notches” ⁵⁹.

• (215) In view of the situation described in recitals (210) to (214) above, the Commission concluded that Chinese credit ratings do not provide a reliable estimation of the credit risk of the underlying asset. On this basis, even if some sampled companies were awarded a good credit rating by a Chinese rating agency, the Commission concluded that such ratings are not reliable. Those ratings were also distorted by the policy objectives to encourage key strategic industries, such as the ACF industry.

• (216) Following final disclosure, the GOC contested that the terms of loans and financing are always connected with credit ratings and claimed that more reliable, i.e. less favourable, credit ratings would not mean that the loan would be issued at higher interest rates. The GOC also disagreed with Commissions reference to PBOC Working Paper No 2017/5 mentioned in the recital (214) above, which confirmed the difference between the average domestic rating and the international ratings. The GOC argued that it is not a working paper issued by the PBOC, instead, it is an academic paper co-authored by a staff member of the PBOC, and thus does not represent the views of the PBOC.

• (217) Furthermore, according to the GOC, the paper tries to explain that there is a difference in notches regarding a Chinese company’s credit rating between the domestic system and the international system, due to the fact that the former is based on the company’s risk ranking among Chinese domestic companies, while the latter is based on the same company’s risk ranking among all the companies of the world. Finally, the GOC argued that several Chinese companies had received higher credit ratings by international agencies.

• (218) The Commission noted first that the claim that difference in credit ratings would not impact the pricing of loans does not have any support in financial literature. Indeed, the basic rationale of credit ratings is to assist financial operators to correctly price the credit risk in their lending decisions. An absence of correlation between credit rating and the price (interest rate) of loans, would indeed indicate that the market is distorted and that the financial institutions are entrusted or directed to provide loans to the companies irrespective of their financial situation and creditworthiness.

• (219) Second, the fact that some companies received higher credit ratings by international agencies does not put into question the Commission’s overall assessment as such. Indeed, as mentioned in recital (211) above, foreign rating agencies typically apply an uplift over the issuer’s baseline credit rating based on an estimate of the firm’s strategic importance to the Chinese Government and the strength of any implicit guarantee when they rate Chinese bonds issued overseas.

• (220) Concerning the PBOC Working Paper No 2017/5, the Commission noted that it was found under the research section of the PBOCs website which indicates the following: “Working Papers carry academic papers by the PBC staff. The views expressed in the papers are those of the authors and may not represent those of their organization. Reports and citations thereof should specify the source as “PBC working papers” ⁶⁰.” Therefore, even though it may not represent as such the official view if the PBOC, it is correct to refer to it as a working paper of the PBOC. In addition, as these papers are released on the official website of the organization, one can reasonably assume that the PBOC at least considers that these papers meet the criteria for valid academic research.

• (221) The Commission also disagrees with the assumption that there is a difference in notches due to the fact that the domestic rating is based on a risk ranking among Chinese domestic companies, while the foreign rating is based on a risk ranking among all the companies of the world. Following this hypothesis, and in view of the fact that around 90 % of the bonds within China are rated AAA, this would lead to the conclusion that nearly all companies in China are ranked the same in terms of risk because they are all performing exceptionally well compared to each other, which seems highly unlikely in terms of economic reality.

• (222) In any event, the Commission noted that since none of the banks providing the loans to the exporting producers cooperated with the investigation, it could not verify whether and how the risk assessment and the credit rating is taken into account. Therefore, it had to rely on facts available, which confirmed that the interest rates for the loans provided were well below market rates and thus that these governmental policies and working paper did play a role in the setting of interest rates as not linked to the real underlying risk.

• (223) Finally, the Commission recalled that its assessment of appropriate credit rating is not based on a mechanistic approach but that the Commission assessed individually the financial situation of each sampled group of exporting producers in order to reflect their particularities, as described in recital (237).

3.4.2.   Preferential financing: loans

3.4.2.1.   Types of loans

(1) Short-term and long-term loans

• (224) The Commission established that companies in all three sampled groups used various short-term and long-term loans to finance their activities. These loans were mainly used for daily operations, working capital needs, for special projects, investments or to replace other loans. Each group also used short-term and long-term export credits.

(2) Loans with the specific purpose to replace other loans

• (225) In the course of the investigation, the Commission found that all sampled groups contracted loans with the specific purpose of replacing loans from other banks. The Commission established that with this practice some companies could rearrange their liabilities and obtain the funds without which they would not be able to meet their repayment obligations, evidencing therefore problems to repay debt.

• (226) Following final disclosure, the GOC claimed that revolving loans are not necessarily a sign of liquidity issues. It claimed that such operations are common by any commercial company, including those in the Union. GOC further claimed that there are various reasons for such refinancing and that there is nothing suggesting that companies making use of such operations would be unable to repay debt.

• (227) The Commission disagreed with the assessment made by the GOC. The Chinese authorities themselves consider revolving loans to be an additional factor of credit risk. As stated in the CBRC’s ‘Guidelines on risk-based loan classification’, revolving loans should be reported at least as a ‘concerned’ loan ⁶¹. A loan falling under this category means that even though a borrower can pay the principal and interest of the loan now, there are some factors, which may negatively affect the repayment thereof.

• (228) Revolving credit facilities do indeed exist in Europe, but their terms and conditions are very different from the Chinese revolving loans. Revolving credit facilities in the Union are basically credit lines, with a pre-determined maximum amount that can be withdrawn and repaid on several occasions during a pre-specified time period. In addition, such credit facilities entail an additional cost, be it a contractual margin on top of the usual short-term market rates, or a predetermined management fee.

• (229) On the other hand, the revolving loans found at the Chinese sampled companies did not have conditions different from other short-term loans. They were not labelled as being a credit line or a revolving credit facility and there were no extra fees or margins attached to it. At first sight, they appeared to be normal short-term loans. However, sometimes the purpose of the loan referred to ‘repayment of loans’. In addition, when verifying the repayments of such loans during the RCCs, it became clear that the capital amount was actually being repaid by fresh loans received from the same bank for the same amount within a week before or after the maturity date of the initial loan. The Commission then extended its analysis to the other loans in the loan tables and found in most cases other instances with exactly the same characteristics. For all these reasons, the Commission maintained its position on revolving loans.

3.4.2.2.   Specificity

• (230) As demonstrated in recitals (161) to (168), several legal documents, which specifically target companies in the sector, direct the financial institutions to provide loans at preferential rates to the ACF industry. These documents demonstrate that the financial institutions only provide preferential financing to a limited number of industries/companies, which comply with the relevant policies of the GOC. The Commission considered that the reference to the ACF industry is sufficiently clear as this industry is identified either by its name or by a reference to the product that it manufactures or the industry group that it belongs to.

• (231) Following final disclosure, the GOC disagreed with the Commission’s finding of specificity within the meaning of Article 4(2)(a) of the basic Regulation. The GOC reiterated its claims that that the legal framework under which the financial institutions are entrusted or directed to provide loans to encouraged industries is only of non-binding nature and that the ACF industry is not encouraged.

• (232) First, the binding nature of the legal framework is already confirmed under recitals (182) and (183). Second, the fact that ACF industry is encouraged has also already been extensively discussed and confirmed in section 3.1..

• (233) The Commission therefore maintained its conclusion that subsidies in the form of preferential lending are not generally available to all industries but are specific within the meaning of Article 4(2)(a) of the basic Regulation.

3.4.2.3.   Calculation of the subsidy amount

• (234) The Commission calculated the amount of the countervailable subsidy based on the benefit conferred on the recipients during the investigation period. According to Article 6(b) of the basic Regulation, the benefit conferred on the recipients is the difference between the amount of interest that the company has paid on the preferential loan and the amount that the company would have paid for a comparable commercial loan, which the company could have obtained on the market.

• (235) As explained in Sections 3.4.1 and 3.4.2 above, the loans provided by Chinese financial institutions reflect substantial government intervention and do not reflect rates that would normally be found in a functioning market.

• (236) The sampled groups of companies differed in terms of their general financial situation. Each of them benefitted from different types of loans during the investigation period with variances in respect of maturity, collateral, guarantees and other conditions. For those two reasons, each company had an average interest rate based on its own set of loans received.

• (237) The Commission assessed individually the financial situation of each sampled group of exporting producers in order to reflect these particularities. In this respect, the Commission followed the calculation methodology for preferential financing through loans established in the anti-subsidy investigation on hot-rolled flat steel products originating in the PRC, as well as in the anti-subsidy investigations on tyres originating in the PRC and certain woven and/or stitched glass fibre fabrics originating in the PRC ⁶², as explained in the recitals below. As a result, the Commission calculated the benefit from the preferential financing through loans practices for each sampled group of exporting producers on an individual basis, and allocated such benefit to the product concerned.

• (238) Following the final disclosure, the Daching group claimed that there was no analysis by the Commission provided as to whether any calculation methodology used in these anti-subsidy investigations on tyres originating in the PRC and certain woven and/or stitched glass fibre fabrics originating in the PRC ⁶³ should be legally and factually adequate to apply in the current investigation. Also, there was no indication that the calculation methodology was the same.

• (239) The analysis of the preferential financing, as provided in the recitals (224) to (236) was comparative to the analysis made in the previous cases ⁶⁴ mentioned in the recital (237). The calculation methodology followed the same principles, while the benefit from the preferential financing through loans practices for each sampled group of exporting producers was made on an individual basis, as explained in recital (237) and disclosed to these producers. The claim of the party was therefore rejected.

(a) Nanshan Group

• (240) The Commission noted that Donghai Foil, the exporting producer in the Nanshan Group, had not received a credit rating for the period considered. Other companies within the Nanshan Group were awarded credit ratings ranging between AA+ and AAA– by Chinese credit rating agencies. In light of the overall distortions of Chinese credit ratings mentioned in Section 3.4.1.8, the Commission concluded that these ratings are not reliable.

• (241) As mentioned in recitals (176) to (178) above, the Chinese lending financial institutions did not provide any creditworthiness assessment in this investigation. Therefore, in order to establish the benefit, the Commission had to assess whether the interest rates for the loans accorded to the Nanshan Group were at market rates.

• (242) Donghai Foil presented itself in a generally profitable financial situation with profit margins ranging between 0,5 % and 7,2 % according to its own financial accounts although the profit margins had declined in the recent years and since 2018 they remained below 1 %. This company only used short-term debt to finance its operations. The Commission assessed the short-term liquidity situation of the company.

• (243) Regarding short-term liquidity, the Commission used liquidity ratios such as current ratio, quick ratio, cash ratio and cash flow ratio. These ratios measure the company’s ability to pay short-term obligations, including short-term debt. The company presented an average current ratio of 1,6 during the IP. Although the current ratio is above 1, the company’s current assets are just enough to pay the short-term obligations, which is not sufficient to justify a high credit rating, for which a company should present a ratio of at least 2. The quick ratio of the company was 1,3 in 2019 and 1,2 in 2020, while a quick ratio of at least 1 is considered as a reference. In fact, a company that has a quick ratio below 1 may not be able to pay off its current liabilities in the short-term. The cash ratio of the company was on average 0,01 in the IP; therefore, the company had insufficient cash at hand to pay its short-term debt. The company also showed a negative cash flow from operating activities (‘CFO’) in 2016, 2017 and 2019. The CFO ratio was extremely low, – 0,02 in 2019 and – 0,04 in 2020. A CFO ratio lower than 1 means that the company does not generate enough cash to cover its current liabilities.

• (244) Considering the liquidity indicators described in recital (243), the Commission concluded that the company at issue presented short-term liquidity problems which results in having a high risk debtor profile.

• (245) The Commission based the long-term solvency risk assessment on various solvency ratio such as debt ratios and coverage ratios. The solvency ratios measure the company’s ability to meet its long-term debt obligations. They are used by lenders and bond investors when assessing the company’s creditworthiness.

• (246) Debt ratios measure the amount of liabilities, in particular long-term debt. The company had a high Debt-to-Assets ratio of 0,54, which means that 54 % of the assets of the company are financed by short-term debt. In addition, this ratio has been sharply increasing over the years. The Debt-to-Equity ratio also increased continuously from 0,3 in 2016 to 1,2 in 2020, which points to the fact the company is financing more and more of its activity mainly through debt. The higher the Debt-to-Assets and the Debt-to-Equity ratios are, the higher the financial risk of the company is, which means that the company may have a harder time servicing its existing debts.

• (247) The coverage ratios measure the company’s ability to serve its debt and meet its financial obligations. Since the company had a negative cash flow from operations in most years, the average CFO-to-Debt ratio of the company in the IP was also negative. This means that the company would not be able to repay its total debt with the operating cash flow it generates. The data from 2020 shows a slightly better situation. Nevertheless, it would still take the company 25 years to repay its debt, thus indicating serious problems of the company to generate enough cash in order to repay is debt.

• (248) Therefore, considering the liquidity and solvency issues described in recitals (242) to (247), the Commission considered that the company presented a fragile financial situation and a high risk profile for potential lenders and investors. In view of the precarious cash situation of the exporting producer, it is therefore not surprising to see that it had no external financing at all, but was financed exclusively via intercompany loans.

• (249) The Commission therefore also looked at the financial situation of the two parent companies of the group, Nanshan Group and Shandong Nanshan. Although their financial situation looked better at first sight, with higher profitability figures (around 8 to 10 %) and lower debt ratios (with a Debt-to-Assets ratio of around 25 % for both of them), similar liquidity issues could be observed. Indeed, the cash ratios of the parent companies stayed consistently below 1 and were on average 0,6 in the IP. Therefore, they had insufficient cash at hand to pay their short-term debt. The companies also showed a consistently low CFO-to-Debt ratio, amounting to 0,4 in the IP, meaning that they did not generate enough cash to cover their current liabilities.

• (250) Moreover, some companies in the group had contracted loans and bonds to repay preceding loans or loans from other banks. This type of loan is considered as an indication that the company is in a worse financial situation than what the financial statements would suggest at first sight, and that there is an additional risk related to their short and long term financing. Finally, the Commission found that Shandong Nanshan had undergone a debt restructuring exercise in the past, and had benefited from a debt-to equity swap deal, as further explained below in Section (358).

• (251) Taking into account the serious liquidity and solvency problems that the financial analysis of the companies in the Nanshan Group, as described in recitals (242)to (247) pointed out, the Commission considered that the overall financial situation of the Nanshan Group corresponds to a BB rating, which is the highest rating that does no longer qualify as ‘investment grade’. ‘Investment grade’ means that bonds issued by the company are judged by rating agencies as likely enough to meet payment obligations and that banks are allowed to invest in them.

• (252) Based on publicly available data on Bloomberg, the Commission used as a benchmark the premium expected on bonds issued by firms with a BB rating, which was applied to the PBOC Loan Benchmark Rate, or after 20 August 2019 to the Loan Prime Rate as announced by the NIFC ⁶⁵ in order to determine the market rate.

• (253) That mark-up was determined by calculating the relative spread between the indices of US AA rated corporate bonds to US BB rated corporate bonds based on Bloomberg data for industrial segments. The relative spread thus calculated was then added to the Loan Benchmark Rate published by the PBOC or, after 20 August 2019, to the Loan Prime Rate published by the NIFC, at the date when the loan was granted ⁶⁶ and for the same duration as the loan in question. This was done individually for each loan provided to the group of companies

• (254) As for loans denominated in foreign currencies, the same situation in respect of market distortions and the absence of valid credit ratings applies, because these loans are granted by the same Chinese financial institutions. Therefore, as found before, BB rated corporate bonds in relevant denominations issued during the investigation period were used to determine an appropriate benchmark.

• (255) The benefit was established by applying the benchmark described in recital (252) – (253) to the period of loan financing during the investigation period.

• (256) Following final disclosure, the GOC considered that the Commission incorrectly disregarded the credit rating of the cooperating exporting producers and disagreed with the methodology used by the Commission to establish a benchmark, which should be based on finding a comparable benchmark on the domestic market instead of applying “out-of-country credit ratings”. The Commission should instead have used comparable loans not affected by the market distortions in the country concerned. The GOC also considered that the Commission reached an arbitrary conclusion when stating that most of the sampled Chinese exporters should correspond to a BB rating.

• (257) The GOC furthermore objected to the use of the relative spread between AA and BB rated bonds as the mark-up and its addition to the PBOC rates. According to the GOC, the method of the relative spread is flawed as the level of the upward adjustment in the first place depends on the level of the going interest rates, and as the PBOC reference rates in the PRC during the relevant years were much higher than the reference rate in the US. Moreover, the use of a relative spread entails that the mark-up becomes a variable figure.

• (258) In response to these claims, the Commission noted the following.

• (259) First, on the use of a benchmark outside the country, as explained above, domestic credit ratings awarded to Chinese companies were considered distorted by the policy objectives of the GOC to encourage key strategic industries and therefore unreliable. As a result, the Commission had to look for a benchmark based on undistorted credit ratings, which can only be found outside the country.

• (260) Second, on the BB rating applied to the companies, the Commission recalls that it did not make an arbitrary decision, but performed an individual financial analysis of all the companies concerned, which pointed to a financial situation corresponding to a BB rating.

• (261) Third, the use of the relative spread was already explained in previous investigations ⁶⁷. Indeed, the relative spread captures changes in the underlying country specific market conditions, which are not expressed when following the logic of an absolute spread. Often, as in the present case, the country- and currency-specific risk varies over time, and the variations are different for different countries. As a result, the risk-free rates vary significantly over time, and are sometimes lower in the US, sometimes in China. These differences relate to factors such as observed and expected GDP growth, economic sentiment, and inflation levels. Because the risk-free rate varies over time, the same nominal absolute spread can signify a very different assessment of the risk. For example, where the bank estimates the company-specific risk of default at 10 % higher than the risk-free rate (relative estimation), the resulting absolute spread can be between 0,1 % (at a risk-free rate of 1 %) and 1 % (at a risk-free rate of 10 %). From an investor perspective, the relative spread is hence a better measure as it reflects the magnitude of the yield spread and the way it is affected by the base interest-rate level. (332) Third, the relative spread is also country-neutral. For instance, where the risk-free rate in the US is lower than the risk-free rate in China, the method will lead to higher absolute mark-ups. On the other hand, where the risk-free rate in China is lower than in the US, the method will lead to lower absolute mark-ups.

• (262) After final disclosure, the Nanshan group also contested the BB rating established by the Commission for the companies in the group, arguing that credit ratings should have been looked at separately for each company, that the analysis was incorrectly limited to the IP, and that there is no evidence that Nanshan actually defaulted on its financial obligations.